Item 1. Business
Item
1. Business.
Business
Overview
We produce and distribute renewable fuel and essential
ingredients. We are also the largest producer of specialty alcohols in the United States.
We operate five alcohol production facilities.
Three of our production facilities are located in Illinois, one is located in Oregon and another is located in Idaho. We have an annual
alcohol production capacity of 350 million gallons, including both fuel-grade ethanol and specialty alcohols ranging from industrial-,
pharmaceutical-, and high-quality food- and beverage-grade alcohols. Of this amount, we can produce up to 110 million gallons annually
of specialty alcohols, depending on our product mix among high-quality beverage-grade alcohol and alcohols of other quality specifications.
We market and distribute all the alcohols produced at our facilities as well as alcohols produced by third parties. In 2023, we marketed
and distributed approximately 383 million gallons combined of our own alcohols as well as fuel-grade ethanol produced by third parties,
and over 1.5 million tons of essential ingredients on a dry matter basis.
We also specialize in break bulk distribution of
specialty alcohols through our Eagle Alcohol subsidiary. We purchase bulk alcohol from suppliers and then store, denature, package, and
resell alcohol products in smaller sizes, including tank trucks, totes and drums that typically garner a premium price to bulk alcohols.
We deliver products to customers in the beverage, food, industrial and related-process industries via our own dedicated trucking fleet
and common carrier.
We report our financial and operating performance
in three segments: (1) Pekin production, which includes the production and sale of alcohols and essential ingredients produced at our
three production facilities located in Pekin, Illinois, which we refer to as our Pekin Campus, (2) marketing and distribution, which includes
marketing and merchant trading for company-produced alcohols and essential ingredients on an aggregated basis, and sales of fuel-grade
ethanol sourced from third parties, and (3) Western production, which includes the production and sale of renewable fuel and essential
ingredients produced at our two western production facilities on an aggregated basis, none of which are individually so significant as
to be considered a separately reportable segment.
Our
mission is to produce the highest quality, sustainable ingredients from renewable resources that make everyday products better. We intend
to accomplish this goal in part by investing in our specialized and higher value specialty alcohol production and distribution infrastructure,
expanding production in high-demand essential ingredients, expanding and extending the sale of our products into new regional and international
markets, building efficiencies and economies of scale and by capturing a greater portion of the value stream.
Production
Segments
We produce specialty alcohols, fuel-grade ethanol
and essential ingredients, focusing on five key markets: Health, Home & Beauty ; Food & Beverage ; Industry &
Agriculture ; Essential Ingredients ; and Renewable Fuels . Products for the Health, Home & Beauty markets include
specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food
& Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils.
Products for Industry & Agriculture markets include alcohols and other products for paint applications and fertilizers. Products
for Essential Ingredients markets include dried yeast, corn protein meal, corn protein feed, corn germ, and distillers grains and
liquid feed used in commercial animal feed and pet foods. We also sell yeast for human consumption. Our products for the Renewable
Fuels markets include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel and biodiesel fuels. Our
specialty alcohols for the Industry & Agriculture, Food & Beverage and Health, Home & Beauty markets represented
approximately 6%, 4% and 2%, respectively, of our sales in 2023 from these three product segments.
- 1 -
We produce our alcohols and essential ingredients
at our production facilities described below. Our production facilities located in Illinois are in the heart of the Corn Belt, benefit
from relatively low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic
and international markets via truck, rail or barge. Our production facilities located in Oregon and Idaho are near their respective fuel
and feed customers, offering significant timing, transportation cost and logistical advantages.
All of our production facilities, other than our
Magic Valley plant, were operating for all of 2023, subject to scheduled and unscheduled downtimes to address facility repair and maintenance.
On January 1, 2023, we temporarily hot-idled our Magic Valley production facility due to extreme natural gas prices, other unfavorable
market conditions and to facilitate the installation of our new corn oil and high protein system. We brought the facility back online
in April 2023. In January 2024, we again temporarily hot-idled our Magic Valley production facility to minimize losses from negative regional
crush margins and to expedite the installation of additional equipment needed to achieve our intended production rate, quality and consistency
from our corn oil and high protein system. We intend to restart Magic Valley production in the second quarter once the upgrades are complete
and crush margins have improved. As market conditions change, we may increase, decrease or idle production at one or more operating facilities
or resume operations at any idled facility.
Marketing
and Distribution Segment
We market and distribute all the alcohols and essential
ingredients we produce at our facilities. We also market and distribute alcohols produced by third parties.
We
have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients.
These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers,
food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms.
Our
renewable fuel customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and
gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade
ethanol and manage the logistics and timing of delivery. Our customers collectively require fuel-grade ethanol volumes in excess of the
supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party ethanol producers. We arrange
for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service
providers in the Western United States as well as in the Midwest from a variety of sources.
We
market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers
use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry
and biodiesel customers. We do not market essential ingredients from other producers.
See
“Note 5 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial
information about our business segments.
- 2 -
Company
History
We
are a Delaware corporation formed in 2005. Our common stock trades on The Nasdaq Capital Market under the symbol “ALTO.”
Our Internet website address is http://www.altoingredients.com. Information contained on our website is not part of this Annual Report
on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such
reports filed with or furnished to the Securities and Exchange Commission and other Securities and Exchange Commission filings are available
free of charge through our website as soon as reasonably practicable after the reports are electronically filed with, or furnished to,
the Securities and Exchange Commission.
Business
Strategy
The key elements of our business
and growth strategy include:
● Focus
on our customer relationships. Although we continue to produce more fuel-grade ethanol
than specialty alcohols, we have repositioned our business to focus on expanding the production
and sale of specialty alcohols and essential ingredients. As a result, our business is now
more service-oriented and focused on specialty products compared to a price-taking business
focused on commodity products. We strive to make our business ever more customer-centric
to enable our premium services to support premium prices and new differentiated and higher-margin
products.
● Implement carbon capture and storage at our Pekin Campus, lowering our carbon footprint . The
Inflation Reduction Act of 2022 raised the carbon capture tax credit to $85 per metric ton, reflecting the 45Q tax incentive
benefits established under the Act. We produce over 600,000 metric tons of carbon dioxide, CO 2, per year at our Pekin
Campus, which sits atop the Mount Simon formation, identified as one of the best and largest aquafers in the country for carbon
storage. We are prioritizing our carbon capture and storage, or CCS, project over other long-term capital projects. We believe the
financial benefits under the Inflation Reduction Act and the substantial additional economic benefits of the environmental
attributes associated with low carbon ethanol will result in excellent returns on investment.
● Expand
product offerings . We are pursuing initiatives to broaden our product offerings to appeal
to a wider range of customers and uses in our key markets. For example, we have secured ISO
9001, ICH Q7 and EXCiPACT certifications at all of our Pekin Campus production facilities.
These certifications appeal to customers with stringent quality demands and enable us to
offer alcohol certified for use as an active pharmaceutical ingredient, or API, and as an
excipient—an inactive component of a drug or medication, such as solvents, carriers
or tinctures—in the pharmaceutical industry. All ingredients we produce for use in
beverages, human and pet foods are third-party certified for ISO 9001 and hazard analysis
and critical control points (HACCP). In addition, all of our alcohols with pharmaceutical
end-uses are ICH Q7, EXCiPACT and ISO 9001 certified, and our animal feed production, including
at our Oregon and Idaho facilities, has undergone third-party Food Safety Modernization Act
(FSMA) auditing. We are reviewing additional certifications and product positioning within
our key markets to expand the range of customers we serve and the uses our products support.
● Implement new equipment and technologies.
We are evaluating and plan to implement new equipment and technologies to increase our production yields, improve our operating efficiencies
and reliability, reduce our overall carbon footprint, diversify our products and revenues, and increase our profitability as financial
resources and market conditions justify these investments.
- 3 -
● Increase
our break bulk capabilities. With the addition of Eagle Alcohol, we have further diversified
our business to include break bulk distribution of specialty alcohols. We can now store,
denature, package and resell alcohol in smaller sizes, including tank trucks, totes and drums
that typically garner a premium price to bulk specialty alcohols. We deliver these products
to customers in the Health, Home & Beauty , Food & Beverage and related-process
industries using our own trucking fleet and common carrier. We intend to leverage Eagle Alcohol’s
transportation expertise across our entire distribution platform, replacing a portion of
our third-party trucking services, reducing our logistics costs and improving margins. We
are also in the process of expanding our distribution territory into new geographies such
as Southern California.
● Evaluate
and pursue strategic opportunities . We are examining opportunities to expand our business
such as joint ventures, strategic partnerships, synergistic acquisitions and other opportunities.
We intend to pursue these opportunities as financial resources and business prospects make
these opportunities desirable.
Competitive
Strengths
We believe that our competitive strengths include:
● Customer and supplier relationships .
We have extensive and long-standing close customer and supplier relationships, both domestic and international, for our specialty alcohols
and essential ingredients. We have an excellent reputation for developing specialty alcohols under stringent quality control standards,
particularly at our Pekin Campus. Our quality management systems are supported by ISO 9001, ICH Q7, and EXCiPACT certifications which
are viewed by our customers as important attestations of our quality control standards .
● Diverse product mix . We offer
a wide range of specialty alcohol, essential ingredient and other products to meet customer demand. We offer multiple alcohol quality
grades ranging from industrial-grade alcohol to the highest beverage grade low moisture 200 proof alcohol available. We also offer a wide
variety of essential ingredients and other products for food, feed and other markets.
● Barriers
to entry . Our production facilities use specialized equipment, technologies and processes
to achieve stringent quality controls, higher yields and efficient production of alcohols
and essential ingredients. Our specialized equipment, technologies and processes, together
with our quality management certifications, strict regulatory requirements, and close customer
and supplier relationships create significant barriers to entry to new market participants.
● Our
experienced management . Our senior management team has a proven track record with significant
operational and financial expertise and many years of experience in the alcohol production
industry. Our senior executives have successfully navigated a wide variety of business and
industry-specific challenges and deeply understand the business of successfully producing
and marketing specialty alcohols and essential ingredients.
- 4 -
● The
strategic location of our Midwest production facilities . We operate three distinct but integrated production facilities at our Pekin
Campus in the Midwest. We are able to participate from that location in the largest regional specialty alcohol market in the United States
as well as international markets.
● We
believe that our Midwest location enhances our overall hedging opportunities with a greater correlation to the highly liquid physical
and paper markets in Chicago.
● Our
Midwest location provides excellent logistical access via rail, truck and barge. In particular,
barge access via the Illinois River to the Mississippi River enables us to efficiently bring
our products to international markets.
● The
relatively unique wet milling process at one of our production facilities at our Pekin Campus
allows us to extract the highest use and value from each component of the corn kernel. As
a result, the wet milling process generates a higher level of cost recovery from corn than
that produced at a dry mill.
● Our
Midwest location allows us deep market insight and engagement in major specialty alcohol,
fuel-grade ethanol, pet food and feed markets, thereby improving pricing opportunities.
● Our Midwest location sits atop the
Mount Simon formation, identified as one of the best and largest aquafers in the country for carbon storage, potentially allowing us to
benefit from this close proximity to store CO 2 .
Overview
of Our Key Markets and Market Opportunity
We produce specialty alcohols, fuel-grade ethanol
and essential ingredients, focusing on five key markets: Health, Home & Beauty ; Food & Beverage ; Industry &
Agriculture; Essential Ingredients ; and Renewable Fuels .
Health,
Home & Beauty
Our
products for the health, home and beauty markets include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers,
disinfectants and cleaners. We offer a variety of specialty alcohols for the health, home and beauty markets, depending on usage and
regulatory requirements, including API-grade, United States Pharmacopeia, or USP, -grade ethyl alcohols, and industrial-grade ethyl alcohol.
We
have ISO 9001, ICH Q7 and EXCiPACT certifications at each of our Pekin Campus production facilities, all of which are viewed as important
attestations of quality control standards. In particular, our ICH Q7 certification qualifies our specialty alcohols for use as an API,
and our EXCiPACT certification qualifies our specialty alcohols for use as an excipient in the pharmaceutical industry. These certifications
enable us to offer products to a wider group of customers and generally at more profitable margins.
- 5 -
Food & Beverage
Our products for the food and beverage market include
specialty alcohols used in alcoholic beverages, flavor extracts and vinegar as well as corn germ used for corn oils and CO 2
used for beverage carbonation and dry ice. The principal specialty alcohol we offer for beverage-grade product is our grain neutral spirits,
or GNS, alcohol. In addition, we primarily sell FCC 190 and USP 190 Ultra into vinegar markets. We are also introducing new high-quality
192 proof and low-moisture 200-proof GNS products to our existing and target customers in the beverage, food, flavor, personal care and
pharmaceutical industries.
We
believe the key drivers in the food and beverage market include consumer preferences for the social currency of brand authenticity and
heritage; consumers seeking unique and personalized experiences; improved consumer access to spirits products; the growth of craft distillers;
and the ability to meet wide-ranging consumer preferences through a broad diversity of spirits categories and cocktails.
Industry & Agriculture
Our products for the industry and agriculture market
include alcohols and other products for paint applications and fertilizers.
Essential
Ingredients
Our
essential ingredients include dried yeast, corn gluten meal, corn gluten feed, and distillers grains and liquid feed used in commercial
animal feed and pet foods. We also sell yeast for human consumption. The raw materials for our essential ingredients are generated as
co-products from our production of alcohols. These co-products are further manufactured, altered and refined into our essential ingredients,
including for special customer applications.
Many
of our essential ingredients are used in a variety of food products to affect their nutrition, including protein and fat content, as
well as other product attributes such as taste, texture, palatability and stability. Our high quality and high purity manufacturing enable
our customers to use some of our essential ingredients in human foods while others are used in pet foods and animal feed.
We
expect the essential ingredients market to grow significantly due to global demand for higher-grade protein feed, such as feed used in
fisheries and other applications.
Renewable
Fuels
Our
renewable fuels products include fuel-grade ethanol used as transportation fuel and distillers corn oil used as a biodiesel feedstock.
Our renewable fuels business is supported by our own production of fuel-grade ethanol as well as fuel-grade ethanol produced by third
parties.
Renewable
fuels, primarily fuel-grade ethanol, are used for a variety of purposes, including as octane enhancers for premium gasoline and to enable
refiners to produce greater quantities of lower octane blend stock; for fuel blending to extend fuel supplies and reduce reliance on
crude oil and refined products; and to comply with a variety of governmental programs, in particular, the national Renewable Fuel Standard,
or RFS, which was enacted to promote alternatives to fossil fuels. Under the RFS, the mandated use of all renewable fuels rose incrementally
and peaked at 36.0 billion gallons in 2022, of which 15.0 billion gallons were required to be produced from conventional, or corn-based,
ethanol. The RFS allows the Environmental Protection Agency, or EPA, to adjust the annual requirement based on certain facts and circumstances.
The EPA has set its annual requirements for conventional ethanol to 15.0 billion gallons for each of 2023, 2024 and 2025. See “—Governmental
Regulation”.
- 6 -
According to the Renewable Fuels Association, the
domestic fuel-grade ethanol industry produced over 15.5 billion gallons of ethanol in 2023, up from 15.4 billion gallons in 2022. According
to the United States Department of Energy, total annual gasoline consumption in the United States is approximately 137 billion gallons
and total annual fuel-grade ethanol blended with gasoline represented approximately 10.4% of this amount in 2023. We anticipate that continued
limited opportunities for gasoline refinery expansions and the growing importance of reducing CO 2 emissions using renewable
fuels will generate additional growth in the demand for fuel-grade ethanol.
Overview
of Alcohol Production Process
Alcohol
production from starch- or sugar-based feedstock is a highly-efficient process. Modern alcohol production requires large amounts of corn,
or other high-starch grains, and water as well as chemicals, enzymes and yeast, in addition to natural gas and electricity.
Dry
Milling Process
In
the dry milling process, corn or other high-starch grain is first ground into flour, then slurried with water to form a mash. Enzymes
are added to the mash to convert the starch into dextrose, a simple sugar. The mash is processed through a high temperature cooking procedure,
which reduces bacteria levels prior to fermentation. The mash is then cooled and transferred to fermenters, where yeast is added and
the conversion of sugar to alcohol and CO2 begins.
After fermentation, the resulting “beer”
is transferred to distillation where the alcohol is separated from the residual “stillage.” The resulting alcohol is concentrated
to 190 proof using conventional distillation methods and then is dehydrated to approximately 200 proof, representing 100% alcohol levels,
in either a molecular sieve system or a grits system. For fuel-grade ethanol, the resulting anhydrous alcohol is then blended with approximately
2.5% denaturant, which is usually gasoline, and is then ready for shipment to renewable fuels markets. For specialty alcohols, the products
can be sold pure or as one of the Tobacco Tax & Trade Bureau (TTB) approved specially denatured alcohol (SDA) formulations to meet
customer specifications.
The
residual stillage is separated into a coarse grain portion and a liquid portion through a screw press or centrifugation process. The
soluble liquid portion is concentrated to about 40% dissolved solids by an evaporation process. This intermediate state is called condensed
distillers solubles, or syrup. The coarse grain and syrup portions are then mixed to produce wet distillers grains, or WDG, or can be
mixed and dried to produce dried distillers grains with solubles, or DDGS. Both WDG and DDGS are high-protein animal feed products.
Wet
Milling Process
In
the wet milling process, corn or other high-starch grain is first soaked or “steeped” in sulfurous acid for approximately
24 hours to soften the whole corn kernel ahead of milling. After steeping, the grain goes through coarse milling to gently open the kernels
to separate the corn germ from which the corn oil can be further extracted in a separate process. The remaining fiber, gluten and starch
components are further separated and sold.
The
stillage from the fermentation process is concentrated in an evaporator and is co-dried with the fiber component to be sold as corn gluten
feed. The gluten component is filtered and dried to produce a high protein corn gluten meal.
The
starch is then processed into alcohol through fermentation. The fermentation process for alcohol at this stage is similar to the dry
milling process. In addition, we separate and dry yeast to produce distillers yeast.
- 7 -
Overview
of Distillers Grains Market
Distillers
grains are produced as a co-product of alcohol production and are valuable components of feed rations primarily to dairies and beef cattle
markets, both nationally and internationally. Our plants produce both WDG and DDGS. WDG is sold to customers proximate to the plants
and DDGS is delivered by truck, rail and barge to customers in domestic and international markets. Producing WDG also allows us to use
up to one-third less process energy, thus reducing production costs and lowering the carbon footprint of our production facilities.
Historically,
the market price for distillers grains has generally tracked the price of corn. We believe that the market price of WDG and DDGS is determined
by a number of factors, including the market prices of corn, soybean meal and other competitive ingredients, the performance or value
of WDG and DDGS in a particular feed formulation and general market forces of supply and demand, including export markets for these co-products.
The market price of distillers grains is also often influenced by nutritional models that calculate the feed value of distillers grains
by nutritional content, as well as reliability of consistent supply.
Customers
We
market and sell through our wholly-owned subsidiary, Kinergy Marketing LLC, or Kinergy, all of the alcohols we produce. Kinergy also
markets fuel-grade ethanol produced by third parties. We market and sell through our wholly-owned subsidiary, Alto Nutrients, LLC, all
of the essential ingredients we produce. We also sell break bulk quantities through Eagle Alcohol to customers in the beverage, food,
industrial and related-process industries.
We
have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients,
including yeast for pet food and human foods. These customers include producers and distributors of ingredients for cosmetics, sanitizers
and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal
care hygiene products, and global trading firms.
Our
renewable fuel customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and
gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade
ethanol and manage the logistics and timing of delivery. We secure additional fuel-grade ethanol supplies from third-party fuel-grade
ethanol plants.
We
market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers
use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry,
renewable diesel and biodiesel customers. We do not market essential ingredients from other producers.
Our
Pekin Campus production segment generated $502.2 million, $521.3 million and $498.2 million in net sales for the years ended December
31, 2023, 2022 and 2021, respectively, from the sale of alcohols. Our Pekin Campus production segment generated $217.7 million, $225.9
million and $189.5 million in net sales for the years ended December 31, 2023, 2022 and 2021, respectively, from the sale of essential
ingredients.
- 8 -
During 2023, 2022 and 2021, our Pekin Campus production
segment sold an aggregate of approximately 208.9 million, 204.6 million and 213.0 million gallons of alcohols and 878,400, 850,300 and
875,100 tons of essential ingredients, respectively, on a dry matter basis.
Our
Western production segment generated $167.0 million, $253.6 million and $107.9 million in net sales for the years ended December 31,
2023, 2022 and 2021, respectively, from the sale of alcohols. Our Western production segment generated $57.3 million, $90.2 million and
$31.1 million in net sales for the years ended December 31, 2023, 2022 and 2021, respectively, from the sale of essential ingredients.
During 2023, 2022 and 2021, our Western production
segment sold an aggregate of approximately 67.0 million, 92.4 million and 37.6 million gallons of alcohols and 642,300, 787,100 and 361,000
tons of essential ingredients, respectively, on a dry matter basis.
Our marketing and distribution segment generated
$263.0 million, $228.9 million and $381.2 million in net sales for the years ended December 31, 2023, 2022 and 2021, respectively, from
the sale of all alcohols.
Our Corporate and other segment generated $15.8
million in net sales from Eagle Alcohol’s business for each of the years ended December 31, 2023 and 2022, and sold 4.0 million
gallons of alcohols for each of those years.
During 2023, 2022 and 2021, we produced or purchased
from third parties and resold an aggregate of 382.5 million, 418.9 million and 479.6 million gallons of alcohols to approximately 88,
114 and 99 customers, respectively. For 2023, 2022 and 2021, sales to our two largest customers, Shell Trading US Company and Chevron
Products USA represented an aggregate of approximately 16%, 20% and 22% of our net sales, respectively. For 2023, 2022 and 2021, sales
to each of our other customers represented less than 10% of our net sales.
Suppliers
Pekin
Campus and Western Production Segments
Our
production operations depend upon various raw materials suppliers, including suppliers of corn, natural gas, electricity and water. The
cost of corn is the most important variable cost associated with our alcohol production. We source corn for our plants using standard
contracts, including spot purchase, forward purchase and basis contracts. When resources are available, we seek to limit the exposure
of our production operations to raw material price fluctuations by purchasing forward a portion of our corn requirements on a fixed price
basis and by purchasing corn and other raw materials futures contracts and options.
During
2023, 2022 and 2021, purchases of corn from our three largest suppliers represented an aggregate of approximately 26%, 38% and 28% of
our total corn purchases, respectively, for those periods. Purchases from each of our other corn suppliers represented less than 10%
of total corn purchases in each of 2023, 2022 and 2021.
Marketing
and Distribution Segment
Our
marketing and distribution operations include alcohols and essential ingredients we produce but also depend upon various third-party
producers of fuel-grade ethanol. In addition, we provide transportation, storage and delivery services through third-party service providers
with whom we have contracted to receive fuel-grade ethanol at agreed upon locations from our third-party suppliers and to store and/or
deliver the ethanol to agreed-upon locations on behalf of our customers. These contracts generally run from year-to-year, subject to
termination by either party upon advance written notice before the end of the then-current annual term.
- 9 -
During
2023, 2022 and 2021, we purchased and resold from third parties an aggregate of approximately 103 million, 118 million and 229 million
gallons, respectively, of fuel-grade ethanol.
During
2023, 2022 and 2021, purchases of fuel-grade ethanol from our four largest third-party suppliers represented 86%, 69% and 76%, respectively,
of our total third-party ethanol purchases for each of those periods. Purchases from each of our other third-party ethanol suppliers
represented less than 10% of total third-party ethanol purchases in each of 2023, 2022 and 2021.
Production
Facilities
We
operate five alcohol production facilities. Three of our production facilities are located in Illinois, one is located in Oregon and
another is located in Idaho. We have an annual alcohol production capacity of up to 350 million gallons, including both fuel-grade ethanol
and specialty alcohols ranging from industrial-, pharmaceutical-, and high-quality food- and beverage-grade alcohols. Of this amount,
we are able to produce up to 110 million gallons annually of specialty alcohols, depending on our product mix among high-quality beverage-grade
alcohol and alcohols of other quality specifications. As market conditions change, we may increase, decrease or idle production at one
or more operating facilities or resume operations at any idled facility. The tables below provide an overview of our five production
facilities.
Pekin
Campus Production Facilities
Pekin
Wet Facility
Pekin
Dry Facility
Pekin
ICP Facility
Location
Pekin, IL
Pekin, IL
Pekin, IL
Current
operating status
Operating
Operating
Operating
Approximate
maximum annual alcohol production capacity (in millions of gallons)
100
60
90
Approximate
maximum annual specialty alcohol production capacity (in millions of gallons)
74
—
66
Production
milling process
Wet
Dry
Dry
Primary
energy source
Natural Gas
Natural Gas
Natural Gas
Western
Production Facilities
Magic
Valley
Facility
Columbia
Facility
Location
Burley, ID
Boardman, OR
Current
operating status
Hot-Idled
Operating
Approximate
maximum annual fuel-grade ethanol production capacity (in millions of gallons)
60
40
Production
milling process
Dry
Dry
Primary
energy source
Natural Gas
Natural Gas
Commodity
Risk Management
We
employ various risk mitigation techniques. For example, we may seek to mitigate our exposure to commodity price fluctuations by purchasing
forward a portion of our corn and natural gas requirements through fixed-price or variable-price contracts with our suppliers, as well
as entering derivative contracts for fuel-grade ethanol, corn and natural gas. To mitigate fuel-grade ethanol inventory price risks,
we may sell a portion of our production forward under fixed- or index-price contracts, or both. We may hedge a portion of the price risks
by entering exchange-traded futures contracts and options. Proper execution of these risk mitigation strategies can reduce the volatility
of our gross profit margins.
- 10 -
Specialty alcohols have relatively low price volatility
and are usually priced at significant premiums to fuel-grade ethanol. The market price of fuel-grade ethanol is volatile, however, and
subject to large fluctuations. Given the nature of our business, we cannot effectively hedge against extreme volatility or certain market
conditions. For example, fuel-grade ethanol prices, as reported by the Chicago Mercantile Exchange, or CME, ranged from $1.58 to $2.67
per gallon during 2023, from $2.00 to $2.88 per gallon during 2022 and from $1.48 to $3.75 per gallon during 2021; and corn prices, as
reported by the CME, ranged from $4.50 to $6.85 per bushel during 2023, from $5.64 to $8.18 per bushel during 2022 and from $4.84 to $7.73
per bushel during 2021.
Climate-Related
and Other Risks
Short-
to medium-term climate-related and other risks include high sensitivity to certain commodity prices such as corn and natural gas; regulatory
changes and political volatility, both domestic and international; ethanol supply and demand imbalances; logistics and storage constraints
from river access during inclement or volatile weather conditions; lack of automation of process optimization; high repair, maintenance
and production costs resulting from older facilities; poor cooling capacity of our older facilities as water temperatures increase; and
international market competition.
Long-term
climate-related risks include water resource limitations; lower or volatile grain availability in local markets; market transition away
from combustion fuels that include renewables; and the energy cost impact of technology such as wet milling and multiple distillation
processes for high-quality alcohol. We also may be impacted by costs and regulatory burdens associated with carbon emissions from our
production and distribution as well as truck transport and packaging associated with Eagle Alcohol’s use of drums and totes. See
“Risk Factors.”
Marketing
Arrangements
We market all the alcohols and essential ingredients
produced at our facilities. We also market and distribute alcohols produced by third parties.
Competition
We
are the largest producer of specialty alcohols in the United States.
Other
significant producers of specialty alcohols in the United States are Archer-Daniels-Midland Company, Grain Processing Corporation, CIE
and Greenfield Global Inc., which collectively make up a significant majority of the total installed specialty alcohol production capacity
in the United States along with many smaller producers.
The
largest producers of fuel-grade ethanol in the United States are POET, LLC, Valero Renewable Fuels Company, LLC, Archer-Daniels-Midland
Company and Green Plains Inc., collectively with approximately 40% of the total installed fuel-grade ethanol production capacity in the
United States. In addition, there are many mid-sized fuel-grade ethanol producers with several plants under ownership, smaller producers
each with one or two plants, and several fuel-grade ethanol marketers that create significant competition. Overall, we believe there
are over 200 fuel-grade ethanol production facilities in the United States with a total installed production capacity of approximately
17.8 billion gallons and many brokers and marketers with whom we compete for sales of fuel-grade ethanol and its co-products.
- 11 -
Our
fuel-grade ethanol also competes on a global market against production from other countries, such as Brazil, which may have lower production
costs than United States producers. Lower feedstock input costs such as sugarcane used in Brazil as compared to corn used in the Unites
States may give foreign producers a competitive advantage. In addition, fuel-grade ethanol from sugarcane feedstock qualifies as an advanced
biofuel, unlike corn ethanol, allowing certain producers to economically satisfy an advanced biofuel standard. Moreover, new products
and production technologies are under continuous development, many of which, if adopted by competitors, could harm our ability to compete.
We believe that our competitive strengths include
our customer and supplier relationships, our diverse product mix, the barriers to entry to our most profitable lines of business—including
our modern technologies and certifications at our production facilities—our experienced management, and the strategic location of
our Midwest production facilities. See “—Competitive Strengths.”
Governmental
Regulation
Our
business is subject to a wide range of federal, state and local laws and regulations directed at protecting public health and the environment,
including those promulgated by the Occupational Safety and Health Administration, or OSHA, the U.S. Food and Drug Administration, or
FDA, the EPA, and numerous state, local and international authorities. These laws, their underlying regulatory requirements and their
potential enforcement, some of which are described below, impact, or may impact, nearly every aspect of our operations, including our
production of alcohols (including distillation), our production of essential ingredients, our storage facilities, and our water usage,
wastewater discharge, disposal of hazardous wastes and emissions, and other matters pertaining to our existing and proposed business
by imposing:
● restrictions
on our existing and proposed operations and/or the need to install enhanced or additional
controls;
● special
requirements applicable to food and drug additives;
● the
need to obtain and comply with permits and authorizations;
● liability
for exceeding applicable permit limits or legal requirements, in some cases for the remediation
of contaminated soil and groundwater at our production facilities, contiguous and adjacent
properties and other properties owned and/or operated by third parties; and
● other
specifications for the specialty alcohols and essential ingredients we produce and market.
In
addition, some governmental regulations are helpful to our production and marketing business. The fuel-grade ethanol industry in particular
is supported by federal and state mandates and environmental regulations that favor the use of fuel-grade ethanol in motor fuel blends
in North America. Some of the governmental regulations applicable to our production and marketing business are briefly described below.
Food
and Drug Regulation
Our
products for the Health, Home & Beauty , Food & Beverage and Essential Ingredients markets are subject to
regulation by the FDA as well as similar state agencies. Under the Federal Food, Drug, and Cosmetic Act, or FDCA, the FDA regulates the
processing, formulation, safety, manufacture, packaging, labeling and distribution of food ingredients, vitamins, cosmetics and pharmaceuticals
for active and inactive ingredients. Many of the FDA’s and FDCA’s rules and regulations apply directly to us as well as indirectly
through their application in our customers’ products. To be properly marketed and sold in the United States, a relevant product
must be generally recognized as safe, approved and not adulterated or misbranded under the FDCA and relevant regulations issued under
the FDCA. The FDA has broad authority to enforce the provisions of the FDCA. Failure to comply with the laws and regulations of the FDA
or similar state agencies could prevent us from selling certain of our products or subject us to liability.
- 12 -
Renewable
Fuels Energy Legislation
Under
the RFS, the mandated use of all renewable fuels, including fuel-grade ethanol, rose incrementally and peaked at 36.0 billion gallons
in 2022, of which 15.0 billion gallons are required from conventional, or corn-based, ethanol for each of 2023, 2024 and 2025. Under
the provisions of the Energy Independence and Security Act of 2007, the EPA has the authority to waive the mandated RFS requirements
in whole or in part. To grant a waiver, the EPA administrator must determine, in consultation with the Secretaries of Agriculture and
Energy, that there is inadequate domestic renewable fuel supply or implementation of the requirement would severely harm the economy
or environment of a state, region or the United States as a whole.
Various
bills in Congress introduced from time to time are also directed at altering existing renewable fuels energy legislation, but none have
passed in recent years. Some legislative bills are directed at halting or reversing expansion of, or even eliminating, the renewable
fuel program, while other bills are directed at bolstering the program or enacting further mandates or grants that would support the
renewable fuels industry.
The EPA has allowed fuel and fuel-additive manufacturers
to introduce into commercial gasoline up to 15% fuel-grade ethanol by volume, or E15, for vehicles from model year 2001 and after. According
to the Renewable Fuels Association, E15 is explicitly approved by the manufacturer for use in approximately 95% of model year 2024 cars
and light trucks based on its annual review of vehicle owner’s manuals and warranty statements. Commercial sales of E15 have begun
in a majority of states. E15 has historically been prohibited in most states during the summer driving season due to concerns over evaporative
emissions and to meet federal clean air standards. For the 2022 and 2023 summer driving seasons, the EPA issued emergency fuel waivers
to allow the sale of E15 to help alleviate high gasoline prices. E15 may, however, be sold year-round in states that have a reformulated
gasoline program. In addition, the EPA proposed in late 2023 that E15 be permitted for sale year-round in various Midwestern states effective
in April 2024. The U.S. Office of Management and Budget approved the proposal in February 2024 but deferred the effective date to April
2025.
Various states including California, Oregon and
Washington, and other regions such as the Canadian province of British Columbia, have implemented low carbon fuel standards focused on
reducing the carbon intensity of transportation fuels. Other states, including New York, Vermont, Massachusetts, Michigan, Illinois, Colorado
and New Mexico, currently have proposed legislation or policies that would establish a low carbon fuel standard program. Blending fuel-grade
ethanol into gasoline is one of the primary means of attaining these goals.
Additional
Environmental Regulations
In
addition to the governmental regulations applicable to the alcohol production and marketing industry described above, our business is
subject to additional federal, state and local environmental regulations, including regulations established by the EPA and state regulatory
agencies related to water quality and air pollution control. We cannot predict the manner by which, or extent to which, these regulations
will harm or help our business or the alcohol production and marketing industry in general.
Human
Capital Resources
As
of March 12, 2024, we had approximately 460 full-time employees. Our human capital resources objectives include attracting and retaining
well-qualified and highly skilled and motivated employees and executives. As of that same date, approximately 44% of our employees were
represented by a labor union and covered by a collective bargaining agreement. We have never had a work stoppage or strike and we consider
our relations with our employees to be good.
Our
compensation program is designed to attract, retain and motivate our personnel. We use a mix of competitive salaries and other benefits
to attract and retain employees and executives. Some of these benefits include matching 401K contributions of up to 6% of salary, health
and wellness programs and a paid service day for employees to give back to their communities. At the direction and with the involvement
of an environmental, social and governance, or ESG, committee established by our board of directors, we have established an ESG working
committee that draws from our many administrative and operational departments to review key policies and procedures, conduct employee
engagement surveys and training, champion volunteering and charitable drives, develop and implement recruiting efforts which promote
diversity and inclusion and prioritize collecting and improving on key metrics from industry frameworks such as the Global Reporting
Initiative and Sustainability Accounting Standards Board standards which are maintained by the International Sustainability Standards
Board of the IFRS Foundation.
- 13 -